MUMBAI UNIVERSITY

PROJECT REPORT ON

THE STUDY OF RATIO ANALYSIS

FOR

BACHELOR OF MANAGEMENT STUDIES

SUBMITTED BY

SURAJ SURESH BHUJBALRAO

ROLL NO. B1415008

SUBMITTED TO
PROJECT GUIDE

Mr. VAISHNAVI BAGUL

INSTITUTE OF MANAGEMENT AND COMPUTER STUDIES

THANE (W)
 2016 - 17

MUMBAI UNIVERSITY

PROJECT REPORT ON

THE STUDY OF RATIO ANALYSIS

For

BACHELOR OF MANAGEMENT STUDIES

SUBMITTED BY

SURAJ SURESH BHUJBALRAO

ROLL NO. B1415008

SUBMITTED TO

PROJECT GUIDE

Mr. VAISHNAVI BAGUL

INSTITUTE OF MANAGEMENT AND COMPUTER STUDIES

 THANE (W)

2016 - 17

CERTIFICATE

(2016-17)

This is to certify that SURAJ SURESH BHUJBALRAO of BMS

(Bachelor of Management Studies) Semester V (2016-17) has successfully

completed the project on STUDY OF RATIO ANALYSIS under the

guidance of Ms. VAISHANVI BAUL.

Date:-
Place:

Course Co-ordinator Principal

Project Guide / Internal Examiner External Examiner

 DECLARATION

I, SURAJ SURESH BHUJBALRAO the student of BMS semester V

(2016-17) hereby declare that I have completed the project on THE
STUDY OF RATIO ANALYSIS successfully.

The information submitted is true and original to the best of my knowledge.

Date:-
Place:
Yours faithfully,

SURAJ SURESH BHUJBALRAO

 ACKNOWLEDEMENT

Working on this project made me learn many things. It has helped me to increase

my knowledge included in my project. This project has helped me to learn about

workers participation in management.

Firstly, I am really thankful to Institute of Management and Computer Studies

(IMCOST). I express my sincere gratitude to our principle

I am very thankful to our project guide who guided me throughout with my project.
I am grateful to our course coordinator of my college for support and guidance.

I would like to express my appreciation and gratitude to people who with their
valuable time helped me in every possible way.

Signature and Name of the student

 INDEX

SR. NO. CONTENTS PAGE NO.

1. List of Tables
2. List of diagrams/figures
3. Executive Summary
Chapter 1 : Introduction
1.1
1.2
4.
1.3
1.4
Chapter 2 : Industry Profile
2.1
5.
2.2
Chapter 3 : Company Profile
6. 3.1
3.2
3.3
Chapter 4 : Conceptual Background
4.1
7.
4.2
Chapter 5: Data Analysis & Interpretation
5.1
8.
5.2
Chapter 6: Findings, Suggestions &
9.
Conclusion
10. Bibliography
11. Annexure
 List of Tables
Table No. Title Page No.
1.1
2.1
2.2
3.1
5.1
5.2
5.3
5.4

List of Graphs

Graph No. Title Page No.

1.1
2.1
2.2
3.1
5.1
5.2
5.3
5.4
 CHAPTER-1
Introduction to project

Introduction
The ratio is help to understand the overall position of the business. The ratio analysis is very
difficult study. The project is full base ratio analysis. The information collected by me is based
on my knowledge. The purpose of the study is, understand how ratio is help to know position of
the business. .
 Ratio Analysis is a form of Financial Statement Analysis that is used to obtain
a quick indication of a firm's financial performance in several key areas. The ratios are
categorized as Short-term Solvency Ratios, Debt Management Ratios, Asset Management
Ratios, Profitability Ratios, and Market Value Ratios. This project giving a clear idea about
usefulness of ratio.

Objective

To understand the liquidity, profitability and efficiency positions of the company during
the study period.

To study the present financial system at KANSAI NEROLAC PAINTSLIMITED.

 To analysis the all the ratio of the

Scope

The project is based on ratio analysis. The project is teach us that how the ratio
are help to understand the position of the business. This information is based on
information which is collected from various sources. On base on this project we
understand the positive point ratio. Various advantages and disadvantages also. After
preparing this project we actually understand ratio.

Limitations

The limitation of study is that not going in deep on the ratio. The extreme points we not
cover in to this project. The one of the biggest limitation is that this project is based only
the ratio thus on other points which part of ratio but our project.
 CHAPTER-2
COMPANY PROFILE

History

Since its inception in 1959, Pidilite Industries Limited has been a pioneer in consumer and
specialties chemicals in India.
Over two-third of the companys sales come from products and segments it has pioneered in India.

The industries product range includes:

Adhesives and Sealants,

Construction and Paint Chemicals,
Automotive Chemicals,
Art Materials,
Industrial Adhesives,
Industrial and Textile Resins and Organic Pigments and Preparations.

Highlights

The Group's turnover is about US $ 350 Million for the year 2006-07.
 In a recent report by Economic Times, Pidilite ranked 131st amongst the top 500 listed
companies in India.
Pidilite Industries is the market leader in adhesives and sealants, construction chemicals,
hobby colors and polymer emulsions in India.
The brand name Fevicol has become synonymous with adhesives to millions in India and
is ranked amongst the most trusted brands in India.
Pidilite is also growing its International presence through acquisitions and setting up
manufacturing facilities and sales offices in important regions around the world.
Fevicol is now the largest selling adhesives brand in Asia.

Customer Relations

The Company continued to take several initiatives to increase awareness of its products and brands,
increase consumption of its products and to strengthen relationship with customers, influencers and
end-users.

Pidilite has reached where it is today mainly due to the close team-work of their employees and due
to their shared value system which emphasizes commitment to excellence, closeness to customers,
and the spirit of innovation.
 Board of Directors

B K Parekh Chairman

S K Parekh Vice Chairman

M B Parekh Managing Director

N K Parekh Joint Managing Director

H K Parekh Director

R M Gandhi Director

N J Jhaveri Director

Bansi S Mehta Director

Ranjan Kapur Director

Yash Mahajan Director

Bharat Puri Director (wef 28th May 2008)

A B Parekh Whole-Time Director

A N Parekh Whole-Time Director

V S Vasan Whole-Time Director

 P RODUCT INFORMATION

Fevicol is synonymous with adhesives in India. Pidilite offers an

extensive range of consumer, craftsmen, engineering and industrial adhesives under Fevicol
brand name. Excellent quality, extensive product range, close relations with customers and
award winning advertisement have made Fevicol one of the most trusted brands in India and
the largest selling adhesives brand in Asia.

Fevicol has been ranked No. 1 in Household Care Segment

Economic Times Edition: Mumbai Date: June 2008

Fevicol Ranked amongst India's top 100 Most Trusted Brands

Economic Times Date: 17th June, 2009

India 's Most Trusted Brand

FEVICOL has been ranked no. 24 overall in the latest survey, Indias Most Trusted
Brand" in the country conducted by Brand Equity (Economic Times). Our ranking has
improved by 7 positions compared to last year.

Report in the Brand Equity section of The Economic Times, on 30th May'07

Pidilite offers a range of hobby & craft products under the Hobby Ideas brand
name. The products are complemented with book, videos and training workshops to make
hobby fun and easy for hobby enthusiasts. Pidilite has also opened Indias first chain of hobby
& craft retail stores under the Hobby ideas brand name. The shops offer a large variety of
hobby & craft products sourced from around the world.

Pidilite offers a wide range of constructions chemicals under the Dr. Fixit
brand name. The extensive product range is used for waterproofing and repair for both new &
old constructions. Dr. Fixit is market leader in retail market of construction chemicals and the
products are available in all leading cement, hardware, tile and paint shops.

M-Seal is India's leading sealant brand. Pidilite offers a range of sealants for
sealing, joining & repairing applications for both consumer & craftsmen market under M-Seal
brand name. M-Seal is also gaining acceptance in international market.
 Ratio Analysis
Introduction:-
Ratio Analysis is a form of Financial Statement Analysis that is used to obtain a quick indication
of a firm's financial performance in several key areas. The ratios are categorized as Short-term
Solvency Ratios, Debt Management Ratios, Asset Management Ratios, Profitability Ratios, and
Market Value Ratios.

Ratio Analysis as a tool possesses several important features. The data, which are provided by
financial statements, are readily available. The computation of ratios facilitates the comparison
of firms which differ in size. Ratios can be used to compare a firm's financial performance with
industry averages. In additi

on, ratios can be used in a form of trend analysis to identify areas where performance has
improved or deteriorated over time.

Because Ratio Analysis is based upon accounting information, its effectiveness is limited by the
distortions which arise in financial statements due to such things as Historical Cost Accounting
and inflation. Therefore, Ratio Analysis should only be used as a first step in financial analysis,
to obtain a quick indication of a firm's performance and to identify areas which need to be
investigated further.

The pages below present the most widely used ratios in each of the categories given above.
Please keep in mind that there is not universal agreement as to how many of these ratios should
be calculated. You may find that different books use slightly different formulas for the
computation of many ratios. Therefore, if you are comparing a ratio that you calculated with a
published ratio or an industry average, make sure that you use the same formula as used in the
calculation of the published ratio.
 Meaning and definition of ratio analysis:

Ratio analysis is a widely used tool of financial analysis. It is defined as the systematic use of
ratio to interpret the financial statements so that the strength and weaknesses of a firm as well as
its historical performance and current financial condition can be determined. The term ratio
refers to the numerical or quantitative relationship between two variables.

Significance or Importance of ratio analysis:-

It helps in evaluating the firms performance:

With the help of ratio analysis conclusion can be drawn regarding several aspects such as
financial health, profitability and operational efficiency of the undertaking. Ratio points out the
operating efficiency of the firm i.e. whether the management has utilized the firms assets
correctly, to increase the investors wealth. It ensures a fair return to its owners and secures
optimum utilization offirms assets.

It helps in inter-firm comparison:

Ratio analysis helps in inter-firm comparison by providing necessary data. An inter firm
comparison indicates relative position. It provides the relevant data for the comparison of the
performance of different departments. If comparison shows a variance, the possible reasons of
variations may be identified and if results are negative, the action may be initiated immediately
to bring them in line.

It simplifies financial statement:

The information given in the basic financial statements serves no useful Purpose unless its
interrupted and analyzed in some comparable terms. The ratio analysis is one of the tools in the
hands of those who want to know something more from the financial statements in the simplified
manner.

It helps in determining the financial position of the concern:

Ratio analysis facilitates the management to know whether the firms financial position is
improving or deteriorating or is constant over the years by setting a trend with the help of ratios
The analysis with the help of ratio analysis can know the direction of the trend of strategic ratio
may help the management in the task of planning, forecasting and controlling.

It is helpful in budgeting and forecasting:

Accounting ratios provide a reliable data, which can be compared, studied and analyzed.These
ratios provide sound footing for future prospectus. The ratios can also serve as a basis for
preparing budgeting future line of action.

It is helpful in determining Liquidity position:

With help of ratio analysis conclusions can be drawn regarding the Liquidity position of a firm.
The liquidity position of a firm would be satisfactory if it is able to meet its current obligation
when they become due. The ability to meet short term liabilities is reflected in the liquidity ratio
of a firm.

It is helpful in determining Long term solvency:

Ratio analysis is equally for assessing the long term financial ability of the Firm. The long term
solvency is measured by the leverage or capital structure and profitability ratio which shows the
earning power and operating efficiency, Solvency ratio shows relationship between total liability
and total assets.

It is helpful in determining Operating efficiency:

Yet another dimension of usefulness or ratio analysis, relevant from the view point of
management is that it throws light on the degree efficiency in the various activity ratios measures
this kind of operational efficiency.
FINANCIAL ANALYSIS
Financial analysis is the process of identifying the financial strengths and weakness of the firm.
It is done by establishing relationships between the items of financial statements viz., balance
sheet and profit and loss account. Financial analysis can be undertaken by management of the
firm, viz., owners, creditors, investors and others.

Objectives of the financial analysis

Analysis of financial statements may be made for a particular purpose in view.

1. To find out the financial stability and soundness of the business enterprise.

2. To assess and evaluate the earning capacity of the business

3. To estimate and evaluate the fixed assets, stock etc., of the concern.

4. To estimate and determine the possibilities of future growth of business.

5. To assess and evaluate the firms capacity and ability to repay short and long term loans

Parties interested in financial analysis

The users of financial analysis can be divided into two broad groups.

Internal users

1. Financial executives

2. Top management

External users

1. Investors

2. Creditor.

3. Workers
4. Customers

5. Government

6. Public

7. Researchers

Significance of financial analysis

To know the operational efficiency of the business:
The financial analysis enables the management to find out the overall efficiency of the firm. This
will enable the management to locate the weak Spots of the business and take necessary remedial
action.

Helpful in measuring the solvency of the firm:

The financial analysis helps the decision makers in taking appropriate decisions for strengthening
the short-term as well as long-term solvency of the firm.

Comparison of past and present results:

Financial statements of the previous years can be compared and the trend regarding various
expenses, purchases, sales, gross profit and net profit can be ascertained.

Helps in measuring the profitability:

Financial statements show the gross profit, & net profit.

Interfirm comparison:
The financial analysis makes it easy to make inter-firm comparison. This comparison can also be
made for various time periods.

Bankruptcy and Failure:

Financial statement analysis is significant tool in predicting the bankruptcy and the failure of the
business enterprise. Financial statement analysis accomplishes this through the evaluation of the
solvency position.

Helps in forecasting:
The financial analysis will help in assessing future development by making forecasts and
preparing budgets.
METHODS OF ANALYSIS:
A financial analyst can adopt the following tools for analysis of the financial statements. These
are also termed as methods of financial analysis.
A. Comparative statement analysis
B. Common-size statement analysis
C. Trend analysis
D. Funds flow analysis
E. Ratio analysis

NATURE OF RATIO ANALYSIS

Ratio Analysis is a powerful tool of financial analysis. A ratio is defined as "the indicated
quotient of mathematical expression" and as "the relationship between two or more things". A
ratio is used as benchmark for evaluating the financial position and performance of the firm. The
relationship between two accounting figures, expressed mathematically, is known as a financial
ratio. Ratio helps to summarizes large quantities of financial data and to make qualitative
judgment about the firm's financial performance.
The persons interested in the analysis of financial statements can be grouped under three head
owners (or) investors who are desired primarily a basis for estimating earning capacity. Creditors
who are concerned primarily with Liquidity and ability to pay interest and redeem loan within a
specified period. Management is interested in evolving analytical tools that will measure costs,
efficiency, liquidity and profitability with a view to make intelligent decisions.

STANDARDS OF COMPARISON
The ratio analysis involves comparison for an useful interpretation of the financial statements. A
single ratio in itself does not indicate favorable or unfavorable condition. It should be compared
with some standard. Standards of comparison are:
Past Ratios: Ratios calculated from the past financial statements of the same firm.
Competitor's Ratios: Ratios of some selected firms, especially the most progressive and
successful competitor at the same point in time.
Industry Ratios: Ratios of the industry to which the firm belongs.
Projected Ratios: Ratios developed using the projected financial statements of the same firm.
TYPES OF RATIOS
Management is interested in evaluating every aspect of firm's performance. In view of the
requirement of the various users of ratios, we may classify them into following four important
categories:

1. Liquidity Ratio

2. Leverage Ratio

3. Activity Ratio

4. Profitability Ratio

Liquidity Ratio
It is essential for a firm to be able to meet its obligations as they become due. Liquidity Ratios
help in establishing a relationship between cast and other current assets to current obligations to
provide a quick measure of liquidity. A firm should ensure that it does not suffer from lack of
liquidity and also that it does not have excess liquidity. A very high degree of liquidity is also
bad, idle assets earn nothing. The firm's funds will be unnecessarily tied up in current assets.
Therefore it is necessary to strike a proper balance between high liquidity. Liquidity ratios can be
divided into three types:

1. Current Ratio

Current ratio is an acceptable measure of firms short-term solvency Current assets includes cash
within a year, such as marketable securities, debtors and inventors. Prepaid expenses are also
included in current assets as they represent the payments that will not made by the firm in future.
All obligations maturing within a year are included in current liabilities. These include creditors,
bills payable, accrued expenses, short-term bank loan, income-tax liability in the current year.

The current ratio is a measure of the firm's short term solvency. It indicated the availability of
current assets in rupees for every one rupee of current liability. A current ratio of 2:1 is
considered satisfactory. The higher the current ratio, the greater the margin of safety; the larger
the amount of current assets in relation to current liabilities, the more the firm's ability to meet its
obligations. It is a cured -and -quick measure of the firm's liquidity.
Current ratio is calculated by dividing current assets and current liabilities.

Current Ratio = Current Assets

Current Liabilities

Where Current Assets= Inventories+ Cash Receivables+ Cash & Bank+ Accruals+ Loans &
Advances+ Bills Receivables + Disposable Investments+ Marketable Securities+ (Storm Term)
+ WIP+ Prepaid Expenses.

And Current Liabilities= Payable+ Short Term Loans+ Bank Overdraft+ Cash credit+
Outstanding Expenses+ Provision for taxation+ Proposed dividend.

2. Quick Ratio

Quick Ratio establishes a relationship between quick or liquid assets and current liabilities. An
asset is liquid if it can be converted into cash immediately or reasonably soon without a loss of
value. Cash is the most liquid asset, other assets that are considered to be relatively liquid asset
and included in quick assets are debtors and bills receivables and marketable securities
(temporary quoted investments).

Inventories are converted to be liquid. Inventories normally require some time for realizing into
cash; their value also has a tendency to fluctuate. The quick ratio is found out by dividing quick
assets by current liabilities.

Quick Ratio= Current Assets Inventories

Current Liabilities

Generally, a quick ratio of 1:1 is considered to represent a satisfactory current financial

condition. Quick ratio is a more penetrating test of liquidity than the current ratio, yet it should
be used cautiously. A company with a high value of quick ratio can suffer from the shortage of
funds if it has slow- paying, doubtful and long duration outstanding debtors. A low quick ratio
may really be prospering and paying its current obligation in time.

Quick Assets= Current Assets Stock In Trade

Quick Liabilities= Current Liabilities- Bank Overdraft.

3. Cash Ratio

Cash is the most liquid asset; a financial analyst may examine Cash Ratio and its equivalent
current liabilities. Cash and Bank balances and short-term marketable securities are the most
liquid assets of a firm, financial analyst stays look at cash ratio. Trade investment is marketable
securities of equivalent of cash. If the company carries a small amount of cash, there is nothing
to be worried about the lack of cash if the company has reserves borrowing power. Cash Ratio is
perhaps the most stringent Measure of liquidity. Indeed, one can argue that it is overly stringent.
Lack of immediate cash may not matter if the firm stretch its payments or borrow money at short
notice.

Cash Ratio= Cash & Bank Balances + Current Investment

Current Liabilities
LEVERAGE RATIOS

Financial leverage refers to the use of debt finance while debt capital is a cheaper source of
finance: it is also a riskier source of finance. It helps in assessing the risk arising from the use of
debt capital. Two types of ratios are commonly used to analyze financial leverage.
Structural Ratios are based on the proportions of debt and equity in the financial structure of
firm.
Coverage Ratios shows the relationship between Debt Servicing, Commitments and the sources
for meeting these burdens.
The short-term creditors like bankers and suppliers of raw material are more concerned with the
firm's current debt-paying ability. On the other hand, long-term creditors like debenture holders,
financial institutions are more concerned with the firm's long-term financial strength. To judge
the long-term financial position of firm, financial leverage ratios are calculated. These ratios
indicated mix of funds provided by owners and lenders.
There should be an appropriate mix of Debt and owner's equity in financing the firm's assets. The
process of magnifying the shareholder's return through the use of Debt is called "financial
leverage" or "financial gearing" or "trading on equity". Leverage Ratios are calculated to
measure the financial risk and the firm's ability of using Debt to shareholders advantage.
Leverage Ratios can be divided into five types.

1. Debt equity ratio

It indicates the relationship describing the lenders contribution for each rupee of the owner's
contribution is called debt-equity ratio. Debt equity ratio is directly computed by dividing total
debt by net worth. Lower the debt-equity ratio, higher the degree of protection. A debt-equity
ratio of 2:1 is considered ideal. The debt consists of all short term as well as long-term and
equity consists of net worth plus preference capital plus Deferred Tax Liability.
Debt Ratio= Long Term Debts

Shareholders Funds (Equities)

2. Debt ratio

Several debt ratios may use to analyze the long-term solvency of a firm. The firm may be
interested in knowing the proportion of the interest-bearing debt in the capital structure. It may,
therefore, compute debt ratio by dividing total debt by capital employed on net assets. Total debt
will include short and long-term borrowings from financial institutions, debentures/bonds,
deferred payment arrangements for buying equipments, bank borrowings, public deposits and
any other interest-bearing loan. Capital employed will include total debt net worth.

Debt Ratio= Debt (Long Term Debt)

Equity(Shareholders Fund)

Long Term Debt = Secured Loans + Unsecured Loans

Shareholders Fund = Share Capital + Reserve

3. Interest Coverage Ratio

The interest coverage ratio or the time interest earned is used to test the firms debt servicing
capacity. The interest coverage ratio is computed by dividing earnings before interest and
taxes by interest charges. The interest coverage ratio shows the number of times the interest
charges are covered by funds that are ordinarily available for their payment. We can calculate
the interest average ratio as earnings before depreciation, interest and taxes divided by
interest.

Interest Coverage ratio= EBIT

Interest
4. Proprietary ratio

The total shareholder's fund is compared with the total tangible assets of the company. This
ratio indicates the general financial strength of concern. It is a test of the soundness of
financial structure of the concern. The ratio is of great significance to creditors since it
enables them to find out the proportion of shareholders funds in the total investment of
business.

Proprietary ratio= Net Worth X 100

Total Tangible Assets

5. Capital gearing ratio:

This ratio makes an analysis of capital structure of firm. The ratio shows relationship
between equity share capital and the fixed cost bearing i.e., preference share capital and
debentures.

Capital gearing ratio= Equity capital

P.S capital +Debentures +Loans

ACTIVITY RATIOS
Turnover ratios also referred to as activity ratios or asset management ratios, measure
how efficiently the assets are employed by a firm. These ratios are based on the
relationship between the level of activity, represented by sales or cost of goods sold and
levels of various assets. The improvement turnover ratios are inventory turnover,
average collection period, receivable turn over, fixed assets turnover and total assets
turnover.

Activity ratios are employed to evaluate the efficiency with which the firm manages and
utilize its assets. These ratios are also called turnover ratios because they indicate the
speed with which assets are being converted or turned over into sales. Activity ratios
thus involve a relationship between sales and assets. A proper balance between sales
and assets generally reflects that asset utilization.Activity ratios are divided into four
types:

1. Total capital turnover ratio:

This ratio expresses relationship between the amounts invested in this assets and the resulting in
terms of sales. This is calculated by dividing the net sales by total sales. The higher ratio means
better utilization and vice-versa.

Some analysts like to compute the total assets turnover in addition to or instead of net assets
turnover. This ratio shows the firm's ability in generating sales from all financial resources
committed to total assets.

Total assets turnover= Sales

Capital employed
2. Working capital turnover ratio:

This ratio measures the relationship between workingcapital and sales. The ratio shows the
number of times the working capital results in sales. Working capital as usual is the excess of
current assets over current liabilities. The following formula is used to measure the ratio:

Working capital turnover ratio= Sales

Working capital

3. Fixed asset turnover ratio:

The firm may which to know its efficiency of utilizing fixed assets and current assets
separately. The use of depreciated value of fixed assets in computing the fixed assets
turnover may render comparison of firm's performance over period or with other firms.

The ratio is supposed to measure the efficiency with which fixed assets employed a high ratio
indicates a high degree of efficiency in asset utilization and a low ratio reflects inefficient use
of assets. However, in interpreting this ratio, one caution should be borne in mind, when the
fixed assets of firm are old and substantially depreciated, the fixed assets turnover ratio tends
to be high because the denominator of ratio is very low

Fixed asset turnover ratio= Net sales

Fixed assets
4. Stock turnover ratio

Stock turnover ratio indicates the efficiency of firm in producing and selling its product. It is
calculated by dividing the cost of goods sold by the average stock. It measures how fast the
inventory is moving through the firm and generating sales.

The stock turnover ratio reflects the efficiency of inventory management. The higher the
ratio, the more efficient the management of inventories and vice versa .However, this may
not always is true. A high inventory turnover may be caused by a low level of inventory
which may result if frequent stock outs and loss of sales and customer goodwill.

Stock turnover ratio= Cost of goods sold

Average stock

Where, Average stock= Opening stock + Closing stock

2
PROFITABILITY RATIOS

A company should earn profits to survive and grow over a long period of time. Profits are
essential but it would be wrong to assume that every action initiated by management of a
company should be aimed at maximizing profits. Profit is the difference between revenues
and expenses over a period of time.

Profit is the ultimate 'output' of a company and it will have no future if it fails to make
sufficient profits. The financial manager should continuously evaluate the efficiency of
company in terms of profits. The profitability ratios are calculated to measure the operating
efficiency of company. Creditors want to get interest and repayment of principal regularly.
Owners want to get a required rate of return on their investment.

Generally, two major types of profitability ratios are calculated:

Profitability in relation to sales

Profitability in relation to investment
Profitability Ratios can be divided into six types

1. Gross profit ratio

First profitability ratio in relation to sales is the gross profit margin. The gross profit margin
reflects the efficiency with which management produces each unit of product. This ratio
indicates the average spread between the cost of goods sold and the sales revenue. A high gross
profit margin is a sign of good management. A gross margin ratio may increase due to any of
following factors: higher sales prices cost of goods sold remaining constant, lower cost of goods
sold, sales prices remaining constant. A low gross profit margin may reflect higher cost of goods
sold due to firm's inability to purchase raw materials at favorable terms, inefficient utilization of
plant and machinery resulting in higher cost of production or due to fall in prices in market.

This ratio shows the margin left after meeting manufacturing costs. It measures the efficiency of
production as well as pricing. To analyze the factors underlying the variation in gross profit
margin, the proportion of various elements of cost (Labor, materials and manufacturing
overheads) to sale may study in detail.

Gross profit ratio= Gross profit X 100

Net sales

2. Operating profit ratio

This ratio expresses the relationship between operating profit and sales. It is worked out by dividing
operating profit by net sales. With the help of this ratio, one can judge the managerial efficiency
which may not be reflected in the net profit ratio.

Operating profit ratio= Operating profit X 100

Net sales
3. Net profit ratio

Net profit is obtained when operating expenses, interest and taxes are subtracted from the gross
profit. Net profit margin ratio established a relationship between net profit and sales and indicates
management's efficiency in manufacturing, administering and selling products.

This ratio also indicates the firm's capacity to withstand adverse economic conditions. A firm with a
high net margin ratio would be in an advantageous position to survive in the face of falling selling
prices, rising costs of production or declining demand for product

This ratio shows the earning left for shareholders as a percentage of net sales. It measures overall
efficiency of production, administration, selling, financing. Pricing and tax management. Jointly
considered, the gross and net profit margin ratios provide a valuable understanding of the cost and
profit structure of the firm and enable the analyst to identify the sources of business efficiency /
inefficiency.

Net profit ratio= Net profit X 100

Net sales

4. Return on investment:

This is one of the most important profitability ratios. It indicates the relation of net profit with
capital employed in business. Net profit for calculating return of investment will mean the net profit
before interest, tax, and dividend. Capital employed means long term funds.

Return on Investment= EBIT X 100

Capital Employed
5. Earnings per share

This ratio is computed by earning available to equity shareholders by the total amount of equity
share outstanding. It reveals the amount of period earnings after taxes which occur to each equity
share. This ratio is an important index because it indicates whether the wealth of each shareholder
on a per share basis as changed over the period.

Earnings per Share= Net Profit X 100

No. of Equity Shares

6. Operating expenses ratio

It explains the changes in the profit margin ratio. A higher operating expenses ratio is unfavorable
since it will leave a small amount of operating income to meet interest, dividends. Operating
expenses ratio is a yardstick of operating efficiency, but it should be used cautiously. It is affected
by a number of factors such as external uncontrollable factors, internal factors. This ratio is
computed by dividing operating expenses by sales. Operating expenses equal cost of goods sold
plus selling expenses and general administrative expenses by sales.

Operating Expenses= Operating Expenses X 100

Sales
 C U R R E N T R A T I O
The current ratio is a popular financial ratio used to test a company's liquidity (also referred to as its
current or working capital position) by deriving the proportion of current assets available to cover
current liabilities.

Formula :

Where, Current Assets = Inventories+Cash receivables+Cash& Bank+Accruals

+Loans&Advances+Bills receivable+Disposable investments
+Marketable securities+(Short term)+WIP+Prepaid expenses;

And Current Liabilities = Payables+Short term loans+Bank overdraft+Cash credit

+Outstanding Expenses+Provision for taxation+Proposed dividend

CURRENT RATIO
FOR THE YEAR ENDED
2006-2007 2007-2008 2008-2009
RS/MILLION RS/MILLION RS/MILLION
CURRENT ASSETS 4118.68 7091.31 7052.8

CURRENT LIABILITIES 1783.03 2311.98 2835.75

CA:CL 2.31 3.06 2.48

Analysis : The standard ratio in this case is 2 : 1. In the year 2007-2008, the ratio is higher
than 2006-2007 and 2008-2009. It reflects under trading or unemployed or
unutilized resources. This is a very bad sign of management.

Cause : In 2007-2008, Current Assets is proportionately higher than the years 2006-2007 and
2008-2009.
QUICK RATIO

The quick ratio - aka the quick assets ratio or the acid-test ratio - is a liquidity indicator that further
refines the current ratio by measuring the amount of the most liquid current assets there are to cover
current liabilities.

The quick ratio is more conservative than the current ratio because it excludes inventory and other
current assets, which are more difficult to turn into cash. Therefore, a higher ratio means a more
liquid current position.

Formula :

Quick Assets= Current Assets Stock in Trade Quick

Liabilities = Current Liabilities Bank Overdraft

Quick Ratio
For the Year Ended
2006-2007 2007-2008 2008-2009
RS/MILLION RS/MILLION RS/MILLION

Quick Assets ( QA) 2142.5 4435.87 4763.87

Quick Liabilities ( QL) 1783.03 2311.98 2835.75

QA : QL 1.2 1.92 1.68

Analysis : The standard ratio in this case is 1 : 1. This means that for every Re.1 of Current
Liabilities, there should be Re.1 of Current Assets. This ratio is also used for testing the
solvency of the enterprise. In the year 2007-2008, that the companies position is solvent and the
company is not utilizing all of its current assets .

Cause :In 2007-2008, the Liquid Assets are proportionately higher than the year 2006-2007.
D E B T- E Q U I T Y R A T I O

The debt-equity ratio is another leverage ratio that compares a company's total liabilities to its total
shareholders' equity. This is a measurement of how much suppliers, lenders, creditors and obligors
have committed to the company versus what the shareholders have committed.

Similar to the debt ratio, a lower percentage means that a company is using less leverage and has a
stronger equity position.

Formula:

Long Term Debt = Secured Loans + Unsecured Loans

Shareholders Fund = Share Capital + Reserve

DEBT EQUITY RATIO

FOR THE YEAR ENDED
2006-2007 2007-2008 2008-2009
RS/MILLION RS/MILLION RS/MILLION

Long term Debt(A) 1383.01 5025.98 5580.14

Shareholder's Fund(B) 4879.8 6424.81 7336.15

A:B 0.28 0.78 0.76

Analysis: The standard ratio in this case is. 5: 1. (Long-Term Debt: Shareholders Fund).
The position of the creditors will be uncomfortable if the ratio is higher than this. The analysis for
the years 2007-2008 and 2008-2009 says that the position of the creditors is uncomfortable.

Cause: In the years 2006-2007 and 2007-2008 both Secured and Unsecured loans have
increased more than proportionately. In the year 2007-2008 only Secured loan increased more
than proportionately.
Net Profit to Proprietors Fund Ratio

The ratio shows the ratio of return on the proprietors fund. The higher the ratio, the greater is the
return. The ratio is helpful to measure the earning capacity of the concern.

Formula:

NET PROFIT TO PROPRIETORS FUND RATIO

FOR THE YEAR ENEDED
2006-2007 2007-2008 2008-2009
RS/MIILION RS/MIILION RS/MIILION

NET PROFIT ( NP ) 1539.75 2242.76 1632.01

PROPRIETORS FUND ( PF ) 4879.8 6424.81 7336.15

NP : PF 0.32 0.35 0.22

Analysis: The ratio is indicating that the earning capacity of the concern is decreasing from
2007-2008 to 2008-2009.

Cause: Comparing 2007 and 2008-2009, that Net Profit in 2008-2009 is proportionately smaller
than 2007-2008.
Net Profit to Fixed Assets Ratio

The ratio is helpful in comparing the Net Profit of the business with its Fixed Assets. This ratio
reveals the extent of utilization of Fixed Assets.

Formula:

NET PROFIT TO FIXED ASSETS RATIO

FOR THE YEAR ENDED
2006-2007 2007-2008 2008-2009
RS/MIILION RS/MIILION RS/MIILION

NET PROFIT (NP ) 1539.75 2242.76 1632.01

FIXED ASSETS (FA ) 3371.50 5470.67 6733.01

NP : FA 0.50 0.41 0.24

Analysis:The ratio analysis is showing less utilization of fixed assets in the year
2008 -2009 from the previous two years 2007-2008 and 2006-2007.

Cause: Comparing the ratios of the years 2007-2008 and 2008-2009 with respect to the year 2006-
2007, Fixed Assets of 2007-2008 and 2008-2009 is proportionately higher than in the year 2006-
2007.
Turnover to Total Assets Ratio

This ratio is used for comparing Sales to the total Assets of the business. It also reveals the extent of
utilization of the the total assets in the business. The ratio proves the efficiency of the management
operational activities. The higher the ratio , the larger is the rate of return on capital invested in total
assets.

Formula

Analysis: During 2006-2007 and 2007-2008 the ratio proves the inefficiency of the management in
operational activities. The rate of return on capital investment is not sufficient of the company in the
year 2007-2008.

Cause: Comparing 2006-2007 and 2007-2008, we see that Total Assets (especially Fixed Assets) is
proportionately higher in the year 2007-2008 than in 2006-2007.
Debtors Turnover Ratio and Average Collection Period

The ratio reveals the number of days the debtors enjoyed as credit period allowed to them. It
shows how quickly receivables or debtors are converted into cash. It is a test of the liquidity of the
debtors of a firm. This ratio is also analyzed to study the debt collection policy of an enterprise. A
large credit period indicates a very bad collection policy. Average collection period is nothing but
the number of days in a year divided by debtors Turnover ratio.

Formula:

DEBTOR'S TURNOVER RATIO AND AVERAGE COLLECTION PERIOD

FOR THE YEAR ENDED
2006-2007 2007-2008 2008-2009
RS/MLILION RS/MILLION RS/MILLION

Debtors 1318.13 2057.48 2413.03

Credit Sales 12901.26 17023.71 19073.5

DEBTORS
TURNOVER
RATIO 9.79 times 8.27 times 7.9 times

AVERAGE
COLLECTION
PERIOD 1.23 months 1.45 months 1.52 months
Analysis: The ratio analysis is saying that the collection policy of the year 2006-2007 is in favor of
the management.

Cause: Debtors turnover ratio is inversely proportional to Average Collection Period. Average
Collection Period is increasing continuously from 2006-2007 to 2008-2009 as Debtors Turnover
Ratio falls continuously.
Working Capital Turnover Ratio

It measures the number of times Sales is achieved to Working Capital. The higher the ratio the
better is the utilization of Working capital.

Formula:

Working Capital = Current Assets Current Liabilities

WORKING CAPITAL TURNOVER RATIO

FOR THE YEAR ENDED
2006-2007 2007-2008 2008-2009
RS/MILLION RS/MILLION RS/MILLION

SALES ( S ) 12901.26 17023.71 19073.5

WORKING CAPITAL ( WC ) 2335.65 4779.33 4217.05

S : WC 5.52 3.56 4.52

Analysis: The ratio of 2007-2008 is least than the previous two years 2006-2007 and 2008- 2009,
so it is indicating the bad utilization of Working Capital during the year 2007-2008.

Cause: In 2007-2008, Working Capital is proportionately higher compared to 2006-2007.

 L I M I T A T I O N

1. Many ratios are calculated on the basis of the balance-sheet figures. These figures are as
on the balance-sheet date only and may not be indicative of the year-round position.

2. Comparing the ratios with past trends and with competitors may not give a correct picture
as the figures may not be easily comparable due to the difference in accounting policies,
accounting period etc.

3. It gives current and past trends, but not future trends.

4. Impact of inflation is not properly reflected, as many figures are taken at historical
numbers, several years old.

5. There are differences in approach among financial analysts on how to treat certain items,
how to interpret ratios etc.

6. The ratios are only as good or bad as the underlying information used to calculate them.
Conclusion

On a final note, I would like to conclude that Pidilite Industries Ltd. has a decent financial
management.

Still then, theres enough room for improvement and further strengthening of its financial position.

By conducting RATIO ANALYSIS of the concern I have observed that the following areas or
items need special attention:

Proper utilization of Resources.

Timely using Current Assets.
Securing the position of Creditors by keeping Secured and Unsecured lines
within a particular limit.
Increasing return on Capital Assets.
Average collection period should be minimized.
Proper utilization of Working Capital.